Monday, December 10, 2007

Income level: economists are wrong

In traditional economic models of decision-making, the most important determinant of individual well-being is the absolute level of income. A recent study based on brain activity observed using functional magnetic resonance imaging (fMRI) proves these models wrong. Indeed, social comparison affects individuals' subjective well-being, and thus behavior.

Dr. Armin FalkThe study was done at the Neuroeconomics Lab at the University of Bonn located at the Life&Brain Research Center by Dr. Armin Falk and his co-workers and is reported in the 23 November 2007 issue of Science, Vol. 318. no. 5854, pp. 1305 - 1308 in the paper Social Comparison Affects Reward-Related Brain Activity in the Human Ventral Striatum.

The team in Bonn had access to two MRI machines placed side by side and was able to concomitantly give the same task to two subjects while rewarding them differently in case of coincident success. They included nineteen subject pairs, and analyzed data from 33 subjects.

The task involved estimating the number of dots on a screen. At the end of each of 300 trials, both subjects received a feedback. This feedback provided information about both subjects' performance (whether the estimates were correct or incorrect), as well as about both subjects' payments in a given trial. Subjects solved the estimation task correctly in 81 percent of the trials.

Analysis of variance suggested that the importance of relative comparison is independent of the level of payment. In addition, there was no significant impact of the side of the activation or the scanner type. Thus, the results provide neurophysiological evidence for the importance of social comparison on reward processing in the human brain.

Compensation boards should keep this in mind, if they want their organization's success to be sustainable.